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Land Value Capture - A potential solution to housing and infrastructure delivery?
BlogPlanning

Following publication of its report at the end of May, the Scottish Land Commission is currently exploring different models of land value capture to finance investment in enabling infrastructure and, in turn, encouraging development particularly in the housing sector.

LVC is a principle, reflecting the idea that increases in land values attributable to society – for example the grant of planning permission, upgrades to infrastructure or external investment – should be shared so as to benefit society as a whole; the belief being that landowners and developers currently benefit from the uplift in value.

The concept of LVC is not exactly new, having featured intermittently in government policy since the end of the Second World War.

Current system – 1) Taxation

At present, land value is already captured indirectly through the various strands of taxation: broadly, capital gains tax and corporation tax apply to increases in value when land is disposed of by individuals and companies respectively; purchasers of land are required to pay land and buildings transaction tax based on the price paid; and occupiers of property are required to pay either council tax or business rates.

Current system – 2) Impact of development

In addition to taxation, the planning system involves developers paying contributions through Section 75 agreements, to off-set the impacts of individual developments, rather than sharing in the increase in the value of the land. It has the disadvantage that the contributions can only be used to fund the infrastructure required to service the development, as illustrated in the Elsick decision and the contributions payable by many developments in Edinburgh towards the tram.

In England and Wales, Community Infrastructure Levy (CIL) has been in force since April 2010. It operates as a tariff system requiring payments to be made towards infrastructure and the impacts of development generally, based on the site and type of development.

There is an infrastructure levy proposal in the Planning (Scotland) Bill. Unfortunately the Scottish Government has side-stepped any real grappling with the issues by including enabling provisions but with no further detail about how such a levy will operate.

Key issues

The concern about delivery of enough sites for housing development is a key issue underpinning the Planning Bill.

The challenge for any LVC system is to ensure that it does not inhibit the supply of sites for development.

Designing a LVC system

The system needs to ensure that:

Individual sites from which value is captured remain viable but not “undertaxed”;

There is still sufficient incentive at a market level for landowners and developers to bring forward sites, rather than sitting tight and waiting for a more favourable political regime; and

Calculation and collection mechanisms are accurate enough to be effective but not to the extent that they cost more to operate than is levied.

Local v. National

As land values are subject to great variation geographically, with little or no increased land value to capture in some areas, this points to a need for redistribution at a regional or national level of any value captured.

At the same time, such variation in land values also suggests that the system for calculating the amount of uplift would require to be done locally to avoid the criticisms that have been levelled at CIL, namely that the setting of rates to date has failed to exploit the value in high-end developments but has also excluded lower value developments so that they make no CIL contribution at all.

A fully effective system for LVC is therefore likely to be both expensive to operate and maintain if it is to capture land value accurately and proportionately.

Who’s to pay and when

To be fair and effective, a LVC system has to resolve the issue of who pays and when:

The landowner at the grant of planning permission?

The developer at commencement or completion of development?

The seller at each subsequent sale of a property on the second-hand market?

The business occupier who extended their premises – should they pay at the point their profits increase from the expansion in their business?

New or increased forms of taxation on landowners – based on land area, or with separate regimes for land use and built development, or delayed payments for asset-rich, cash poor landowners?

Acquisition of land at existing use value

An alternative approach being mooted is to allow the compulsory purchase of land by local authorities at existing use value, removing the current requirement to take account of development potential.

The land value capture would then be achieved by the local authority, obtaining planning permission and developing or selling the site. Landowners may then be incentivised to part with sites, rather than waiting for political change and risking being CPO’d in the meantime. However, it could encourage landowners to oppose any CPO, in the hope of achieving a sale to a developer at a higher value. The Compulsory Purchase Association has reservations about such an approach and its significant limitations if there is to be no capture of land value arising from sales on the private market.

Conclusion

It seems, then, that what we are seeking for is a ‘Goldilocks’ system of LVC: one that captures just the right amount of value, wielding just the right amount of local or central government power and leaving just the right amount of viability to ensure that houses and supporting infrastructure are actually built.

The remit of the Scottish Land Commission is to recommend changes to laws and practices. Whether their proposals for LVC will be taken forward remains to be seen. If such a “system” were to be adopted, lessons must be learned from difficulties experienced with previous schemes of LVC and the limited success of CIL in England and Wales, the margin for error is certainly a small one.

The Commission is “engaging with partners from both the public sector and the development industry to try to identify collaborative approaches that will work. Now is the time to engage and be heard.